What If My Car Is Worth More than I Declared for Insurance?

Last year used car prices went up around 40% and created a situation in which vehicles insured appeared to be undervalued. It was a phenomenon that affected premiums at the end but nobody could have predicted such a thing and certainly policyholders had nothing to do with it. So, this was not a case of deliberately declaring a vehicle’s value lower so that motorists can get cheaper rates.

Nevertheless, it creates a situation in which insured cars’ current values are more than what was declared by the owners. As the reasons are clear, the insurance companies will have to shoulder the difference and pay the vehicle’s Actual Cash Value when they total it.

One of the first things a claim adjuster or insurer looks at is if the details provided in auto insurance quote forms was “to the best of the applicant’s knowledge”. In other words, they look if there was any intention of knowingly defrauding the insurer by twisting the facts. So, it isn’t policyholders’ fault if the used automobile market unexpectedly turned higher and left the vehicles insured undervalued.

However, this results in greater losses for vehicle insurers due to the fact that they now have to pay much more when they total a car. Moving forward, they have to take the new auto values into account and add a bit more of premiums for the losses suffered previously so that they can make up for them. That is why car insurance rates have been going up lately.

If there wasn’t such a fluke of circumstances in the market, what happens if an insured car is totaled and the adjuster discovers it is under-valued? Would they refuse to pay the claim? People over or undervalue their properties without realizing and it is an honest judgement in most cases. They are not experts in the matter and they may not be up to date with the market. Carriers would not refuse to settle just because it is worth more money, especially when it was not a deliberate attempt to fraud.

What this would be considered and how it would be dealt with can be explained by a commonly used underwriting practice called “proportional rule of insurance”, which¬†explains how several underwriters share the risk. Basically, each firm would undersign for only a certain portion of the total exposure and they would only pay their share in case of claims.

This principle applies when a car is somehow not covered up to its real price. What would normally happen is that the loss adjuster would consider the vehicle to be part covered and part self-insured. In other words, if the listed amount on the policy was only about 80% of its current value it would be considered 20% uninsured. In these calculations, if your automobile were totaled, you would only get 80% of its worth from the carrier, minus deductibles.

However, the proportional rule of insurance usually allows for 10 – 20% discrepancies and therefore considers the car (or another property) to be fully insured if its declared value in the policy coverage was at least 80% of its current value.

Generally, what worries insurers is the intent to fraud them. People try to get more money when they have a claim even though they didn’t suffer the loss. Or they give false information in the hope that premiums will be much lower. Motorists need to provide accurate information to the best of their knowledge. As long as policyholders can come up with a reasonable explanation and proof, they would not face a claim investigation. For example, owners can prove how much they paid for their autos at the time of purchase with a receipt.

As explained above, we are currently facing a phenomenal used car price increase. Under normal circumstances, proportional rule of insurance hardly ever a subject that comes up in car insurance claim settlements because vehicles lose their value really fast so their Actual Cash Value is mostly lower than what is declared by the time there is a claim. Besides, there needs to be a clause in the policy for proportional rule to be used.